Startups Need Mergers and Acquisitions for Growth

Every entrepreneur tries to maximize his startup growth by building and selling more products and services to the widest geographic area that he can support. This strategy is called “organic growth,” yet it alone may yield only a fraction of the potential you could achieve, unless you add the additional strategies of partnerships and M&A (mergers and acquisitions).

Many entrepreneurs are paranoid about the partnership approach and think that M&A is only an alternative for large companies who are flush with cash. Both of these qualms are wrong and shortsighted. Laurence Capron and Will Mitchell explain why in their book, Build, Borrow, or Buy: Solving the Growth Dilemma. I like their recommended framework for emerging firms, as well as large multinationals, to help build an optimal growth strategy for your company:

Evaluate internal development versus external sourcing. Building through internal development, or organic growth, makes the most sense when you have a core set of skilled internal resources. Use external sourcing to fill in the non-critical gaps.

Add basic partner contracts or alliances. Using contracts with partners for growth resources (“borrowing”) is best when you can both define the resources clearly and protect them with effective contractual terms. Don’t use alliances for core competencies.

Invest in selective strategic alliances. Borrowing by way of a more engaged alliance helps you obtain targeted resources when you and a partner collaborate through limited points of contact and have complementary goals for your joint activities.

Actively pursue mergers and acquisitions. M&A is “buying” resources for growth. This makes sense when you anticipate needing the freedom and control to make major changes to enhance growth with a credible integration path while retaining key people.

The real challenge here is balance. Too much emphasis on organic growth can become a straitjacket that leads only to incremental innovation and limited horizons. Too much reliance on growth via contracts and alliances makes you vulnerable to partners’ actions and conflicts of interest. Overreliance on acquisitions drains resources and de-motivates internal teams.

In every startup, as well as in mature companies, there is no substitute for constantly maintaining a pipeline of alternatives. This requires constant focus, as well as maintaining the skill set to do things like the following:

Locating and not losing knowledge from within. Startups often find it difficult to retain key personnel and to control proprietary ideas. Rather than push non-compete agreements on your superstars, it’s more productive to create incentive systems and creative ways for them to work more independently, just for you.

External scanning for resources. Startups can’t usually afford a business development team, so that effort is just one of the measurements that should fall on every CTO and CEO. Here is also an ideal opportunity to use your external advisors and Board to help identify external resources, potential partnerships, and acquisition opportunities.

Partial acquisition. Budget relatively small “educational investments” at early stages to learn from a target firm without a full commitment, or without leading either partner astray. These can reinforce the operational and financial linkages through licensing or alliance agreements and allow the relationship to develop prior to an acquisition commitment.

Spin-ins. This is a transaction whereby two firms agree on a set of milestones that would trigger a partnership or acquisition if the innovator achieves the specified goals. The initiator funds the innovators’ development activities and gives them the flexibility to work independently.

There is no question that startups which manage the broadest alternatives for growth will gain competitive advantages. This selection capability is a skill and a discipline that every entrepreneur needs to nurture and develop over time. The world and current economic environments have changed. The past can be a deadly rear-view mirror. Look for new horizons.